Notes From Underground: From the Eve Of Destruction to Days of Exhaustion

Yesterday the screen watching and the trading became so exhaustive that my eyes glazed over and all of the quote boxes began melting together as if Salvador Dali was painting what I was analyzing and trading. Trading fatigue has definitely set in as the world moves from crisis to crisis and back again. The amount of news that gathers on my screen every hour reminds me of being back in graduate school, except that the tension now and the speed at which it arises overwhelms the mind. Not complaining as this is the way I have chosen to make my living.

The worst thing for the world in which we dwell used to be boredom, but that was prior to the sophisticate algos that now drive prices. There are opportunities for trades several times a day, but most important is to choose the best trades with the most definable risk. Tonight’s NOTES FROM UNDERGROUND IS GOING TO BE SEVERAL QUICK HITTERS:

1. The IDIOTS ON TV WHO NEED TO HAVE A SIMPLISTIC REASON FOR EVERYTHING–GOLD DID NOT BREAK BECAUSE THE CME RAISED MARGINS. The fact that margins were raised from $4,500-$5,500 is a laughable reason for GOLD to break. The purchasing of 175,000 DOLLARS of GOLD for an extra thousand dollars is not going to drive anybody out of their positions. The shorts have to come up with the same extra capital so why didn’t they buy in their shorts, as they certainly are the ones sitting on losers so the extra capital should have impacted them to a greater extent.

Some analyst will issue a statement about margins increasing 25%, as if that matters in a ZERO interest rate environment. GOLD broke because equities rallied so all those who were late haven players sold their recent purchases to buy stocks as they heard the sirens calling. Also, as the news out of FRANCE about SOCGEN seemed to subside, there was some minor unwinding of the GOLD/CURRENCY CROSSES, except of course for the SWISS FRANC.

2. SOCGEN: Word to Sarkozy and company. If a rogue trader can force the CENTRAL BANKS to drastically cut interest rates to assauge the markets–think of JEROME KERVIEL and the Marin Luther King day move by the FED et. al–what the hell is TRICHET and the ECB thinking about as SOCGEN is without question sitting on monstrous losses on their sovereign debt portfolio? It is without question that the European Financial Stability Facility has been about allowing the large European Banks to exit some of their BONDS and pass the risk onto EUROPEAN TAXPAYERS.

How much of Peripheral Bonds are the FRENCH Banks holding? Nobody knows so we will have to take Sarkozy’s word for the difficulty of the situation. Late afternoon, the market got word that France, Italy, Spain and Belgium have placed a ban on the SHORT SELLING of FINANCIAL STOCKS. Why would the authorities remove one of the main ways for firms to protect themselves by utilizing an efficient, liquid market? Also, if you want to elevate the sense of crisis and cause more unease, invoke a ban as if the financial markets want find an alternative. No wonder my eyes are glazing over. Stupid is as Stupid does!

3. There was talk that the SNB was going to PEG THE SWISS FRANC TO THE EURO. This is an interesting proposition that has no chance of coming to fruition. The Swiss chose not to enter the EURO at the beginning so why would they choose to PEG now and at such a high level? If the SWISS pegged they would waste an incredible amount of capital every time the markets attacked the PEG–REMEMBER THE BANK OF ENGLAND 1992. If the SWISS could do that then it would have succeeded in quashing the appreciation of the SWISS already.

No, as the readers of NOTES are well aware, I am thinking that the SNB and the SWISS government will impose some type of tax resulting in a very expensive negative interest rate. It is important to continue to use the GOLD/SWISS cross as an indicator of potential SWISS action as GOLD would/will be ultimate world HAVEN. The SWISS was very weak again today as some depositors took the money and sought out other alternatives.

Also, the CANADIAN/SWISS cross is good to watch as the Canadian economy is presently on sound footing and Canadian banks and BONDS are deemed solid instruments for purposes of collateral. THE LOONIE suffers from its very close relationship to the U.S. economy and its heavy reliance on commodities. Check your technicals and see if the collateral for repo begins to make the CANADIAN DOLLAR an attractive alternative.

4. Finally, we are going to see the BOND VIGILANTES emerge. The FED has fixed short-term rates for two years and with no QE program in play, the swings in the BONDS and NOTES are going to increase as any increase in growth or rise in price pressures leaves the interest rate traders with a very narrow field in which to ascertain value. Volume should begin to increase dramatically in the CME/BOT DEBT contracts even as the volume in the EURODOLLARS diminishes as the rates going out two years are now under the thumb of the FOMC.

The talking heads will talk regardless. If they don’t know why something went down they say “profit taking” and if they don’t know why something went up they say “bottom fishing” (or the now more trendy and annoying “nibbling”). I like to watch CNBC with the sound off.

Could you see the Swiss being more barbaric than just charging a fee to holders of Francs – like not only pegging the Euro to the Franc, but giving customers Euros instead of Francs-with the beauracratic “it’s the same thing” ?!

A couple questions Yra. First, eurozone obviously has issues, but without looking at newsflow and based solely on price action the euro has not gone anywhere. Maybe this is a product of the dollar being the first or next worse currency and euro vs any other G10 is a different situation, but what do you make of the failure of euro to break lower?

Also, looking out to fall when Draghi takes over at the ECB, how do you see this playing out? As an Italian, we have to assume he will help his own. Does that mean saving Italy by committing ECB capital to buy Italy bonds to force the euro lower? Or does it include getting the French involved with IMF now headed by Lagarde.

MBS–all good points.Yes the EURO stays strong as the DOLLAR is suspect as to what the policy plan is really meant to accomplish.Draghi may turn out like Trichet to be more German as they seem to feel the gaze of the eyes of the hard German money crowd.Trichet built his “reputation ” on le FORT FRANC and deems himself a super hard money man—hence his desire to raise rates in July–beware of a Frenchman posturing himself as an anti-inflation German.Lagarde of course is another story and because the Geithner crowd laid down for the French we are going to rue the day she became Director of the IMF.Interseting to watch the EURIBOR futures as the DEC 2011 trades premium to SEPT. as the thinking is that Draghi willcut rates as trichet is too arrogant to admit he made a gargantuan mistake

Hi Yra-
OUTSTANDING!! Also having a bit of a grasp of the int’l game, your intrinsic perception of how the whole global macro-financial clockwork clicks along is impressive. Even when the gears are warping under the stress. The insights on not just THAT the powers-that-be are misguided, but WHY it won’t work is always helpful.

And yes, the magpies of the financial fourth estate are just as bad as the official machinations they are covering. Lest anyone forget, a few weeks ago they were repeating (ad nauseum) the panicked view over just how much more the US was going to have to pay to raise money if there was a rating downgrade.

ERIC H>–no chance .The country of Switzerland is one of the most democratic nations in the world.The use of referenda as a political tool helps keep democracy alive–can you really imagine the SNB passing out EUROS to settle the citiizens accounts—that would be rape beyond the kings of old shaving the edges of coins to diminish the medal content.Don’t forget SWiss militias–an automatic weapon under every bed—

Thanks for the response Yra… If the dec euribor contract is pricing in a rate cut, is the euro fx mkt missing something? If a cut is truely coming, it should show up in the gold/euro spread first.

Also, the yoyo that is the ECB is not creating price stabilty as their mandate, but actually price instability with all this back forth. Time to look for protection in hard stuff? Crude, gold, brent, the softs?

@MBS
it might be that euros stays stronger than it normally would as market already prices in the likely final solution to the mess being a split between euro ‘north’ and euro ‘south’, with most commercial/financial contracts being continued as euro ‘north’ – that would certainly drive euro ‘north’ up sharply against alll other currencies, particularly the $ – just a guess

Great post! I am in complete agreement with your point on the SNB taking action to restrain the Franc. They are certainly using words in order to direct market psychology in a way that would devalue the Franc.

One question I have – why have you not been giving much attention or analysis to the Renminbi? As soon as they widened the trading band the currency strengthened considerably, and justifiably, in a very short time. I have not done extensive research, but China’s aggressive attempts to control and restrain inflation over the last 12 months clearly indicates they are attempting to prevent an economic bubble. That being said, do you think it is possible for China to enter any type of economic downturn in the medium term ie 1-3 years? If so, how do you think the macro enviornment reacts? Certainly gold would be THE safe haven then.

I see China as a rapidly expanding emerging economy that is positioning itself as THE developed global economic power, I just do not see this being sustainable – especially with the measures the policymakers have taken. I am by no means seasoned enough to tactically time a move like this….what do you think?

Jedi–good points.But as you know as a long time reader I have great mistrust of any data and info that flows out of the state of China.It seems thsat China is willing to let the Yuan rally as it helps prevent import prices from rising.Also the Chinese will have a stronger currency in which to be an acquirer of global assets.For now the weak YUAN has given them as much as they could have ever expected.This is one of the reasons I am looking to see if Mexican manufacturing starts to pick up as U.S. based corporations begin to shift manufacturing to the Border Factories—Malquiadores

Mike –I agree .The fundamentals will reassert themselves in time –but now it is just algo driven–and it is coming at a time that so many global macro are pulling back as much of their fundamental analysis has been overwhelmed by the pricing of turmoil—think U.S. debt markets